Dealing With Earnings Season

Earnings season is upon us yet again. Earnings reports often bring feelings of anxiety, relief, anguish and elation. Over time I have developed a basic rule of thumb when it comes to earnings: do not buy (or sell short) a stock right before a company is about to announce earnings. Why? Because trying to pick a winning trade based on an earnings report is hard to do. A stock whose chart patterns is setting up perfectly can be decimated by an earnings miss. Even if the company reports great earnings, its stock can still sell off for a variety of other reasons.

Now there are strategies to trade earnings. I’m sure plenty of people make lots of money trading earnings and if you have a proven system stick with it. However, for many, including the individual investor who probably has limited time and certainly limited access to information, this can be quite risky.

Some professional traders will even sell a position they own before earnings then buy it back after the report. I don’t generally do that. If I own a stock that I believe will keep working, I will hold through earnings and only get out if it gets hit. But again, I generally do not initiate a position within a week or so before a scheduled announcement. Following this simple rule of thumb can help protect both your capital and your confidence. Not to mention a selloff on good earnings can present a great buying opportunity.